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FRM Part II · FRM Exam Part II · An Introduction to Securitisation

A bank wants to recognise significant risk transfer on a synthetic securitisation of corporate loans. Which arrangement would most likely cause the supervisor to deny recognition?

Implicit support, such as buying back deteriorating assets beyond contractual obligations, would likely cause denial of significant risk transfer, because it shows the originator still bears the credit risk. The other arrangements are consistent with recognised risk transfer under the framework.

  1. AThe bank buys credit protection on the mezzanine tranche from an unconnected, well-capitalised counterparty
  2. BThe bank retains the first-loss tranche but sells the mezzanine and senior tranches
  3. CThe bank provides implicit support, such as buying back deteriorated assets beyond its contractual obligationsCorrect
  4. DThe transaction has a clean-up call exercisable when the pool falls below 10% of original balance

Explanation

Providing implicit support beyond contractual obligations shows risk has not truly been transferred and typically leads supervisors to require capital as if the assets were still held, and may bar future relief. Retaining first loss, buying protection from unconnected parties and a 10% clean-up call are consistent with recognised treatment.

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